DBS Group’s first quarter is another home run (DBSDY)

investment thesis

We went about a year ago Upgraded DBS Group Holdings Co., Ltd. (OTCPK:DBSDY) (OTCPK:DBSDF) From hold to buy. So we concluded that the decline in share was the culprit. Prices ranged from S$35 to S$28, making DBS shares attractive enough to buy.

Please note that our stance on DBS Group Ltd. in Singapore is the same whether it is trading ordinary shares on the Singapore Exchange or trading American Depositary Receipts in the United States.

There are two classes of ADR in DBS groups. One is DBSDY, which represents four shares of common stock, and the other is DBSDF, which represents only one share of common stock.

So, if you want to upgrade or downgrade your stance, all three options for investing in banks are covered.

It turned out very good Any of these three options is where you should invest.

As stock prices rise to new highs, shareholders naturally begin to wonder if it’s a good time to take a profit.

This reminds me of something banker and investor Baron Nathan Rothschild once said.

I never buy at the bottom and I always sell too soon.”

In this article, we will consider whether to maintain our previous buying stance or change course.

As always, we start with the company’s latest financial results

DBS Q1 Results

DBSDY is Net profit was S$2.96 billion, an improvement of 15% compared to the previous year. Compared to the previous period, this was an improvement rate of 30%. It’s safe to say that Banks hit a home run last quarter.

Return on equity increased to 19.4%.

Net interest income increased 8% to S$3.5 billion, continuing to rise by 2 basis points to 2.77% due to higher NIM. A year ago, we thought the NIM would start to fall, but thanks to Mr. Powell, global interest rates have remained high for a long time.

At least for now.

I described last quarter as a “home run” not only because net interest income increased, but also because fee income was strong.

Net fee income increased 23%, exceeding $1 billion for the first time. The increase was driven by wealth management fees and loan fees.

Management says wealthy customers who previously kept their cash in savings are now increasingly leveraging their money. This will add to your bank’s bank charges. In that respect, I have some concerns as an investor. When others are getting greedy, it’s time for us to be cautious.

It was positive that DBS consumers were starting to spend more money. The bank’s card fees rose 33% to $301 million. Clients included in the recently acquired Citi Taiwan portfolio accounted for 75% of his increase.

The bank’s division responsible for market trading activities also performed well, posting revenue of $246 million in the first quarter.

Total expenses increased 10% to S$2.08 billion due to inflationary pressures and the cost of integrating new investments.

Non-performing assets increased 3% from the previous quarter to $5.22 billion. The creation of a new his NPA was partially offset by repayments and amortization. The non-performing loan ratio was 1.1%, unchanged from the previous quarter.

The CET1 ratio was 14.7% at the end of the first quarter. DBS

DBS Group evaluation

Conventional wisdom holds that as stock prices rise, the margin of safety shrinks.

DBS’s share price on the Singapore Stock Exchange has risen to S$35.70 at the time of writing. That means its market capitalization has reached $102 billion. This is the highest ever for a listed company in Singapore.

If you compare these banks, you will find that they are very similar in terms of price/value.

Singapore’s three largest domestic banks are DBSDY, Oversea-Chinese Banking Corporation (OTCPK:OVCHF), United Overseas Bank, Ltd. (OTCPK:UOVEY) (OTCPK:UOVEF).

All three banks are good banks.

We chose DBSDY because we believe it has better growth potential due to its presence in some of Asia’s key trade and wealth hubs, including Hong Kong, Taiwan, and India in the Greater Bay Area. It is based on what is happening.

When it comes to stock prices, we are careful when a company’s CEO or CFO sells stock.

In early May, immediately after receiving the bonus share of 1 share for every 10 shares owned at the end of April, DBSDY’s CEO Piyush Gupta sells 95,000 shares The total amount is approximately 3.4 million Singapore dollars. He currently owns 2.69 million shares of common stock.

That’s just a fraction of the number of shares he owns. But he likely thought it was a good price to sell the stock.

At least fair value.

Singapore and Hong Kong economy

We will focus on the two largest markets for DBS. They are Singapore and Hong Kong.

Singapore

• inflation and interest rates

Recent attention has focused on what central banks will do about interest rates. After a decade of ultra-low interest rates, businesses and individuals have become accustomed to low borrowing costs. Only when the tide goes out can you realize who was swimming naked.

The central bank of most countries sets the steering rate. The steering rate is the interest rate banks have to pay to borrow money from the central bank the next day. The discount rate is the interest rate paid by the central bank when banks have excess liquidity to lend to the central bank.

Raising interest rates is a way for central banks to control inflation.

On the other hand, the Monetary Authority of Singapore does not use interest rates as an instrument. They use an exchange rate mechanism against a basket of currencies to control inflation. When the Singapore dollar appreciates, it becomes cheaper to import raw materials. Therefore, there is a need to reduce inflationary pressures.

On April 12, MAS released its latest economic statistics and forecasts. The core of MAS Inflation rate averages 3.4% January and February are year-on-year comparisons. Their forecast is that inflation levels should remain high in the coming quarters but slow towards the end of 2024.

Singapore’s Ministry of Trade and Industry announced that Singapore’s economy’s GDP growth rate in the first quarter of 2024 was a seasonally adjusted 0.1% quarter-on-quarter, slowing from 1.2% in the fourth quarter of 2023.

Fortunately, Singapore’s official unemployment rate is low.

On the topic of interest rates and employment, we would like to share with our readers that Singaporean borrowers can avail of a two-year fixed mortgage rate of 2.85%, which is not high in our opinion. Certainly not in the historical context. At present, forced sales of real estate are rare.

Hong Kong

• inflation and interest rates

To compare apples to apples, compare like this: Hong Kong inflation It’s the same standard as Singapore. His average for January and February 2024 is just 1.3% on a year-over-year basis, significantly lower than his 3.4% reported by Singapore.

The Hong Kong dollar has been pegged to the US dollar for 40 years. This means that their interest rates must closely follow the Federal Reserve’s interest rates. According to an article in the South China Morning Post, Hong Kong’s major banks kept the Hong Kong dollar prime lending rate unchanged at 5.875% in early May. Interestingly, they pay only 0.875% interest on their deposits.

Hong Kong’s economy recorded moderate growth in the first quarter of 2024. According to advance predictions, Real GDP grew by 2.7% From one year ago to the first quarter of 2024. On a seasonally adjusted quarterly basis, real GDP increased by 2.3%.

Unemployment is also low at just 3%, according to the Hong Kong government’s Census and Statistics Department.

Commenting on Hong Kong vs. Singapore, it seems that trust in Hong Kong is lower than in Singapore.

Hong Kong’s real estate market and consumer confidence are depressed. DBSDY also reported that demand for home loans in Hong Kong is weak. They also said in a recent presentation to analysts: Exposure to Hong Kong commercial real estate was S$18 billion. However, they reassured investors that stress test results do not raise concerns for now.

Risks to the paper and conclusions

The bank still faces headwinds in increasing lending in Hong Kong, as some of its loans have shifted from Hong Kong to mainland China. Singapore’s real estate market is also weak. As such, we are likely to see a decline in new mortgages in two major markets.

DBS is also keeping an eye on the situation in unsecured consumer lending and small business lending, as interest rates remain elevated for a longer period of time than initially expected.

In his final presentation to analysts, the company’s CEO, Mr. Gupta, said:

Unless interest rates fall significantly over the next 12 months, it’s not unreasonable to think that at some stage provisions will start to increase and revert to their long-term averages. ”

What is the average?

We looked at 10 years of historical data for both non-performing assets and non-performing loans to determine what the average is.

The 10-year average NPA is 5.03, which is basically where we are today.

The average bad debt is 1.3%. Although we do not believe he is at elevated risk due to his current NPA level, we will be monitoring him closely in the coming quarters.

Summary. DBSDY stock is not expensive from a valuation perspective.

But we feel that all this good news is already priced in.

We downgrade DBSDY to a Hold level as we believe the risk/reward for future share price appreciation is less favorable at current share price levels.

We have no plans to sell any positions at this time as we believe that shareholders will receive sufficient dividends in the near future. It’s difficult to predict where stocks will go from here. We are gearing up for both directions without losing any sleep.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.